The climate risk reporting journey - Amazon Web Services · 2018-10-09 · The climate risk reporting journey A corporate governance primer ... The TCFD was charged with developing
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of climate-related risks and opportunities, and mechanisms
for evaluation and oversight)
Strategy, financial planning,
capex and risk management
Risk management oversight
Appropriate benchmarks
(metrics and targets)
The annual report
When will
we get there?
Page 3
1
Where do we need to go? Governance foundations (developing board understanding of climate-related risks and opportunities, and mechanisms for evaluation and oversight)
TCFD RECOMMENDATION CATEGORY
Governance Strategy
Risk Management
Metrics & Targets
Have the board and senior management (including legal, governance, finance and risk teams) been briefed on climate-related risks (and opportunities) to enable us to discharge our obligations in relation to governance, strategy and risk management oversight? In particular, do we understand the different drivers (and consequences) of physical climate impacts (increase in both acute catastrophic and gradual onset) and economic transition-related risks (policy/regulatory (including under the Paris Agreement), technological, stakeholder) for our business? Do we understand the difference between climate change mitigation and adaptation? Do we understand the role of stress-testing and scenario analysis in strategic governance, planning and risk management? Do we understand any relevant exposures to stranded asset risk?
By whom are we being advised on these issues? How have we assured that their expertise is relevant and appropriate? What processes are in place to ensure that we remain informed of developments in this area?
How are issues associated with climate change integrated into our board governance (strategic and oversight) responsibilities? Is this issue receiving adequate time and focus within the board / committee agenda?
In what part(s) of the business does operational responsibility for climate-related issues (identification, assessment, management and monitoring) reside? Who is responsible and accountable for this issue within management? Are we satisfied that relevant staff (or the experts that they consult) have the appropriate competence and resources? How is climate change integrated into our strategic reviews, capital and business planning, performance objectives and 'standard' risk management framework? How are relevant exposures, and progress against strategies and targets, monitored and assessed by management, and reported to the board or its committees (on both a regular and exceptions basis)? (See further under Dynamic Navigation - Risk Management Oversight, below)
Have directors updated their standing declarations to identify extraneous interests that may compromise their ability to exercise independent judgment on climate-related governance issues in the best interests of the corporation?
Do climate change-related matters impact on our Directors' & Officers' insurances – from coverage exclusions and 'occurrences', to disclosure and notification considerations?
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2 Route selection
Strategy, financial planning, capex and material risk management
TCFD RECOMMENDATION CATEGORY
Governance Strategy
Risk Management
Metrics & Targets
What foreseeable climate-related risks (and opportunities) are relevant to our sector(s) and geographic location(s) – not only within our business fence-lines, but upstream in our supply chain and downstream in our distribution chains? Are there any factors that compound (or mitigate) our enterprise risk exposures vis-à-vis other companies in our sector(s)?
How does our exposure differ under stress-testing against a range of plausible climate futures (including one aligned with Paris Agreement goals to keep average warming 'well below' 2C), over various time horizons relevant to our business and investment planning and useful asset life-cycles (short, medium and long-term)? On what basis do we believe these scenarios represent an adequate range of credible physical, economic transition and litigation risks (and opportunities) that could reasonably be expected to impact on our business performance or prospects?
Which of those risks present a material exposure to our corporate strategy or operations (in both absolute and relative terms) – and on what basis is the threshold of 'materiality' set? Over what time frames?
What are the key climate-related scenarios, variables and assumptions in this strategic analysis (including forward-looking stress testing)? On what basis have these input parameters been selected as appropriate? How do the outcomes vary under a range of different, albeit plausible, assumptions?
What are the implications of identified material climate risks and opportunities for our business model? What strategic responses are open to us to continue to thrive – stress-tested against a range of potential climate futures (as above)? This should include both a strategic response to potential market shifts (external impacts), and an operational response to lower our own exposure to climate-related risks (including, but not limited to, emissions mitigation strategies as against science-based targets) (internal responses). What does it mean for our product/services offering, R&D investment, M&A, capital allocation and cost of finance? Is our strategy clearly articulated, and has it been reviewed/approved by the board and/or its committees (as appropriate)?
What corporate policy(s) do, and should, we have in place in relation to climate change and its impacts? Does this policy align with Paris Agreement goals and/or science-based emissions reduction targets? Why/why not? How is this policy reflected in our procurement and other contracting practices?
What are the metrics and targets against which we measure our exposure to (and assess our progress in managing) climate-related risks, including (but not limited to) absolute and intensity-based emissions reduction targets? Over what time frames, and against which base year? Why are these parameters relevant and appropriate? What are our key performance indicators against those targets?
What events or developments should trigger our reassessment of such risks and/or a shift in strategic trajectory? What signposts do we monitor to gauge whether our central (and other) case assumptions require revision? What are the trigger points for our re-assessment of these issues? How, and how often, do we re-calibrate relevant signals?
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3 Dynamic navigation &
Risk management oversight 4 When will we get there?
Metrics and targets
TCFD RECOMMENDATION CATEGORY
Governance Strategy Risk
Management Metrics & Targets
What are the key climate-related variables and assumptions, and metrics and targets, that we apply? Why are these the appropriate parameters/benchmarks? How do the outcomes vary under a range of different, albeit plausible, assumptions?
Have our variables, assumptions, parameters, benchmarks and methodologies been updated to reflect scientific, economic and financial developments (although recognising that these may be held constant for the purposes of meaningful trend analysis)? What impact do these developments have for our strategy, risk management and disclosure?
How does management determine the order of priority to be given to each relevant climate-related risk/opportunity?
What assessments of remuneration structures have been conducted to ensure that no perverse incentives exist that may undermine our policies or progress (eg. that may favour capex/investment in assets at risk of being stranded)? Conversely, have we considered revision of our remuneration policies to reflect progress against climate-related business objectives?
How do we engage with, or otherwise seek to influence, stakeholders (employees, government, suppliers, customers) on climate-related issues? Have we considered whether our external associations, activities and engagements (such as membership of industry groups and/or government lobbying activities) may be perceived as inconsistent with our corporate climate change policy and/or disclosures?
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5 Communicating our path
Are annual report disclosures complete, accurate and reliable?
TCFD RECOMMENDATION CATEGORY
Governance Strategy
Risk Management
Metrics & Targets
Is our industry identified as one at ‘high risk’ in the TCFD Recommendations? Have our annual reports been prepared with regard to the TCFD (or other recognised frameworks such as SASB, GRI/IIR, CDSB etc)? If not, why not – particularly if we are in a high-risk industry? If so, what is the process by which our reports have been reconciled or assured against the relevant framework(s)?
Can management provide a brief overview of the process for preparing the financial statements, explanatory notes, directors’ report (eg. the Operating & Financial Review (OFR)) and corporate governance statements, including the review processes? What has made management (and, independent of management, our external auditors) confident about the accuracy and integrity of the information reported as it relates to the impact of climate change on our performance and prospects? What are the key assumptions made, and metrics or statements requiring the most judgment? In what areas did our external auditor disagree with or challenge positions taken by management? Were any climate risks issues raised as key audit matters? What steps have been taken with regards the auditor’s responsibility relating to other information to ensure consistency between financial and narrative disclosures?
How have any material impacts of climate change on our financial position been assessed (eg. asset valuation or impairment, liability provisions, revenues, expenditures, and cash flows)? In particular, what methodology has been applied in impairment testing of material assets? Are these reasonable and supportable? Are particular disclosures of key assumptions and uncertainties warranted? Do we need to adjust asset recognition, reported valuation or relevant liability provisions to account for our assessment of stranded asset risks? Should we be disclosing our Scope 1, 2 and/or 3 emissions (in line with GHG Protocol Methodology), on an absolute and/or intensity basis (eg. emissions efficiency by unit of output)? Why/why not?
What range of climate-related assumptions, scenarios and potential material financial impacts have been considered by management but not disclosed? On what basis has it been determined that they should not be disclosed? Are we proposing to disclose only favourable scenarios? How do reported performance and prospects vary under a range of different, albeit plausible, assumptions? Is it appropriate to disclose the nature of the material variables that may impact on the relevant outcome ('modifying factors'), and a description of our methodologies? Directors may ask management and/or investigating accountants to provide a due diligence report that outlines the procedures followed, inquiries undertaken, supporting/verification information and conclusions reached.
What forward-looking statements in relation to the risk (and opportunities) associated with climate change for our financial prospects are appropriate to disclose to the market (including in the directors' report/OFR)? Are any such statements reasonable and supportable, and grounded in stress-testing and scenario planning in relation to both physical and economic transition-related risks, over time-horizons consistent with our capital and financial planning cycles? Does that disclosure accurately convey the potential for materially different outcomes depending on key variables and assumptions? Is it consistent with our internal assessment of strategic direction and long-term value drivers? Have those forward-looking statements, and any explanatory text that accompanies them, been subject to legal review?
How should our disclosures evolve in response to recent developments in regulatory, institutional and shareholder expectations, and relevant litigation? Do we make any other ‘voluntary’ disclosures in relation to climate change-related risks – including (for example) a separate sustainability report or response to CDP (formerly the Carbon Disclosure Project) questionnaire? If so, how does management ensure that statements in our annual reports and continuous disclosures are consistent with any voluntary disclosures? What steps have been taken in consultation with external auditors to address the challenges of assurance over these forms of emerging forms of external reporting?
On the basis of the above, are we satisfied that there are reasonable grounds to base our view that all potential material climate-related risks to our performance and prospects have either been appropriately disclosed, or resolved as not material?